A guide to termination of long term contracts in the energy sector

Energy Alert


The recent decline in, future and uncertainty surrounding, the price of oil and gas has caused energy sector companies to look particularly closely at their contractual rights and obligations. A long term contract that was once highly profitable may now be less commercially attractive. For example, buyers under long term offtake agreements such as gas sales agreements may well be able to obtain cheaper gas from other sources and, in those circumstances, will want to renegotiate or terminate existing arrangements. Sellers seeking to recover sunk exploration costs, on the other hand, will want to hold the buyer to its existing bargain.

It is in this context that energy sector companies need to be particularly aware of the law as it relates to the termination of contracts, in order that they can effectively bring to an end commercial arrangements which are no longer economically viable, take action where counterparties are in breach, exert pressure in the context of renegotiations, or resist wrongful termination. Businesses looking to escape their obligations by terminating must take care; terminating a contract when there is no legitimate basis to do so can expose them to significant liability.

We summarise below the key principles of English law as it relates to termination, including new developments, specifically the recent cases of MSC Mediterranean Shipping v Cottonex Anstalt, C&S Associates v Enterprise Insurance, Grand China Logistics v Spar Shipping, Vinergy International v Richmond Mercantile, Globe Motors v TRW Lucas, MWB Business Exchange Centres v Rock Advertising, Monde Petroleum v WesternZagros and Ilkerler Otomotiv v Perkins Engines.

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